Question

On January 1, 2014, Korsak, Inc. established a stock appreciation rights plan for its executives. It entitled them to receive cash at any time during the next four years for the difference between the market price of its common stock and a pre-established price of $20 on 100,000 SARs. Current market prices of the stock are as follows:

January 1, 2014 $35 per share
December 31, 2014 38 per share
December 31, 2015 30 per share
December 31, 2016 33 per share
Compensation expense relating to the plan is to be recorded over a four-year period beginning January 1, 2014.
What amount of compensation expense should Korsak recognize for the year ended December 31, 2014?
a. $ 300,000
b. $ 450,000
c. $ 375,000
d. $1,800,000

Answer 1

The compensation expense that Korsak, Inc. should recognize for the year ended December 31, 2014 is $ 375,000.

Step-by-step explanation:

The compensation expense that Korsak, Inc. should recognize for the year ended December 31, 2014 is $ 375,000. To calculate the compensation expense, we need to find the difference between the market price and the pre-established price for each year and multiply it by the number of SARs. Here's how it is calculated:

1. For January 1, 2014, the market price of the stock is $35, so the difference is $35 - $20 = $15. The compensation expense for this year is $15 * 100,000 = $1,500,000.
2. No compensation expense is recognized in 2015 since the market price is lower than the pre-established price.
3. For December 31, 2016, the market price is $33, so the difference is $33 - $20 = $13. The compensation expense for this year is $13 * 100,000 = $1,300,000.

The total compensation expense for the year ended December 31, 2014 is $1,500,000 - $1,300,000 = $200,000. Since this expense is recognized over a four-year period, the annual expense is $200,000 / 4 = $50,000. Therefore, the compensation expense that Korsak, Inc. should recognize for the year ended December 31, 2014 is $50,000 * 4 = $375,000.